There are different types of personal loans available in the UK. Whether you need a small amount of money or a large sum, there’s a personal loan available to meet your needs. Even if you have a good credit score or a bad credit score, personal loans come in many forms that it can get confusing at some point. To help you better understand the concept of personal loans, here’s a quick guide you can read.
Two Major Types of Loans
All types of personal loans fall into two major types, which are the secured and unsecured loans. If you’re thinking of applying for a loan and you don’t know where to start, comparing these two major types of loans may help guide you choose the perfect loan deal to meet your financial needs.
What are unsecured loans?
Unsecured loans are the types of personal loans that are easy and quick to avail because there’s no security or collateral needed. Credit cards, signature loans, payday loans and credit union loans fall into this category of personal loans. When applying for unsecured loans, you just need to meet the basic requirements and your application is often good as approved.
There are just a couple of downsides worth noting. With no collateral requirement, the loan offers are smaller than if you apply for a secured loan instead. Interest rates are also relatively higher. Because lenders only have your signature as security, the risks on their end are higher. They raise the interest rates to secure their capital. On the bright side, unsecured loans come as handy alternative for borrowers with bad credit. No matter your credit score, unsecured loans offer the promise of quick cash.
What are secured loans?
Secured loans are exactly the opposite of unsecured loans. To avail the loan, you need a security or collateral that may come in the form of your home, vehicle and other properties. Examples of secured loans include mortgages, auto loans and home equity lines of credits among others. Since there’s a security involved, loan offers are larger and the repayment terms are also longer. Interest rates are also significantly lower especially if you have a good credit score.
But just like unsecured loans, secure loans are not without its downsides. If you have a poor credit score, it will be hard to avail a secured loan. If you can avail one, expect for the interest rate to be higher than usual. Then there’s also the risk of repossession. Because you secured your personal loan against your asset or property, you essentially agree with the terms that allow lenders to repossess said asset in case you can no longer repay the loan. For example, if you used your home as security, there’s a chance that you may lose your home to your lender if you miss several months of loan repayments.
Which is better?
As you can see, both secured and unsecured loans have their own sets of advantages and disadvantages. Unsecured loans, for example, are ideal if you are in need of a small sum of money and if you have bad credit that can’t get a loan anywhere else. Secured loans, on one hand, are ideal for borrowers who have a property or asset they can use as collateral. Either way, personal loans offer financing options to meet a wide array of financial needs. There’s really no such thing as one type is better than the other. At the end of the day, it boils down to what is suitable for your financial situation.